Debtor vs Creditor

Debtors refer to the party to whom the goods are supplied or sold on credit by another party, and the former owes money to the latter. A creditor is a party that supplies the product or services to another party on credit and has to receive the money from the latter.

Creditors are those who extend the loan or credit to a person, and it may be a person, organization, or firm. In contrast, a debtor is one who takes the loan and, in return, has to pay back the amount of money within a stipulated period with or without interest.

The creditor can be defined as the person who gives a loan to any other person, and in return, he expects to get some kind of interest on the loan he is giving. The creditor provides this loan for a particular period, which can be small, like a few days or months, or can be a few years also. He extends credit to any other person. Thus by extending this loan or credit, he allows another person to repay this loan after a specific period that may be with or without interest. Generally, a creditor gives a loan or sells goods on credit. There are two types of creditors:

• Personal creditors like family, friends, etc.;
• Real creditors like banks and financial institutions.

The creditor generally charges interest on the loan extended by him. Those people who sell goods on credit, also known as creditors, their main motive or interest is to enhance sales. A creditor is a party, person, or organization with a claim on the services of the second party. A creditor is a person or an institution to which money is owed.

The first party or the creditor has extended some property, money, or service to the second party with the assumption that the second party will return the equivalent amount of property, money, or service. The term creditor is usually used for short-term, long-term bonds, and mortgage loans. Creditors are mentioned as a liability in the balance sheet of an organization.

A debtor can be defined as the individual or firm who receives the benefit without paying for it in terms of money or money’s worth immediately but is liable to pay the money back in due course of time. The debtors are shown as an asset in the balance sheet.

A debtor can also be defined as the person who owes money to the other person or institution, for example, any person who takes out a loan or purchases goods or services on credit. A debtor must pay back the amount he owes to the person or institution from which he has taken the loan after the credit period is over. So once a debtor pays back the money, he gets released from the debt. When the person who has given a loan (the creditor) gets satisfied with lesser money, the debtor can get released by paying a lesser sum.

A debtor can be an individual, company, or firm. If this loan is taken from a financial institution, then the taker is called a borrower. If a loan is in debentures form, the one who takes the loan is known as the issuer. So we can say that the debtor receives the benefit without giving money or money’s worth. A debtor is an asset until the time he pays the money back.

• Creditors are those who extend the loan or credit to a person, and it may be a person, organization, or firm. In contrast, a debtor is one who takes the loan and, in return, has to pay back the amount of money within a stipulated period with or without interest.
• Creditors have the right to offer discounts to the debtors, whereas the debtor receives the discount.
• While a creditor is shown as a liability on a firm's balance sheet, a debtor is shown as an asset until he pays off the loan.
• Creditors are the parties to whom the debtors owe an obligation to pay back.
• Debtors have been mentioned under the accounts receivable category, whereas creditors come under accounts payable.
• The creditors do not have the provision of doubtful debt created on them, whereas the provision of dubious debt is created on the debtors.

A particular business transaction has two parties involved- creditor and debtor. A creditor is the one who lends the money, whereas a debtor is the one who owes the money to the creditor. So there should not be any confusion between these terms. To ensure the smooth flow of the working capital cycle, a company must keep track of the time lag between the receipt of payment from the debtors and the payment of money to the creditors.

This article has been a guide to Debtor vs. Creditor. Here we discuss the top differences between debtor and creditor along with infographics and a comparison table. You may also have a look at the following articles –

• Liability vs. Debt
• Bad Debt Reserve
• Debt Yield
• Debt Covenants